We’re gradually seeing more companies in the UK and around the world considering environmental, social and governance (ESG) factors.

    As more ESG-friendly products and services enter the market, consumers may begin to demand sustainable choices as standard. With this shift comes the potential risk that there are no suitable regulatory controls in place to meet this new demand.

    The FCA are looking to implement changes around sustainability disclosure requirements (SDR) and sustainable investment labels. It’s hoped that this will improve transparency and build trust in the market with increased clarity around sustainable products and services. 

    To help inform further policy proposals the FCA published a discussion paper on disclosures and labelling in November 2021 and asked for responses from across the financial sector. Our Sustainability working group at Nucleus reviewed this discussion paper and provided a response with our key concerns and recommendations.

    What does the discussion paper cover and why is this needed?

    Feedback on the paper will be used by the FCA to help develop policy proposals in Q2 2022. This is part of the UK government’s efforts on Sustainable Disclosure Requirements (SDR) as set out in the Greening Finance: A Roadmap to Sustainable Investing. The discussion paper asks for comments on the scope, criteria, content and alignment of the proposed disclosure and labelling changes.

    Earlier in 2021 in the FCAs ‘Dear Chair’ letter they called out the risk of misleading consumers with products and providers claiming to be ESG-friendly without having to prove it. Greenwashing is something that we can see in several industries, not just finance, with companies latching onto the idea of being sustainable and environmentally friendly, but then not being able to back up their claims. 

    Due to this, the FCA are now wanting to focus on building transparency and trust between businesses and consumers. And to do that they will need to bring in new rules on disclosures and labelling.


    Companies will need to report on their sustainability risks, opportunities, and impacts which many companies are already tracking even if they aren’t publicly reported. 

    The new SDRs will build on the recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD). It will also include wider social and sustainability issues as opposed to solely being climate related which we fed back in our response to the FCA. ESG is a well-known concept within financial services, and we think that bringing in requirements that don’t consider the social and governance aspect would be a severe lapse in judgement.

    The discussion paper asked for views on consumer-facing disclosures which could be used to provide basic information regarding key sustainability-related characteristics. We believe that a standardised approach would provide a clear and transparent overview of a product’s sustainability and allow for easier comparisons. As a comparison, a detailed disclosure could also be used at entity and product levels to give more detailed information. This could be useful to wider stakeholders including policymakers, regulators, and institutional investors.

    At an entity level, we believe that disclosures should be easily accessible and in a consistent format to other firms or products increasing transparency and readability. In terms of the scope, It's our belief that disclosures should apply to all regulated products and services. Even if a product isn’t marketed as ESG, the disclosures should still be mandatory.

    One of the questions created some discussion for us around the role of third-party verification for disclosures and labelling. Current existing disclosure documents such as the key features document are not currently required to be verified by a third party. If that document is acceptable without the need of a third party, then any ESG disclosures or labels should be dealt with in a similar manner.


    Research from FCA economists published in July 2021 found that labels were a driving factor for consumers when comparing sustainability credentials of investment products. The FCA are now looking to implement a set of objective criteria to classify and label investment product using common terminology.

    A potential approach could be to only label products that make sustainability-related claims. Another approach is to have a range of classifications and labels to cover all investment products making it clear whether a product is sustainable or not. The FCA have proposed a 5-tier classification and labelling approach:

    Figure 3 from DP21/4 - FCA owned image

    The responsible category may happen to include sustainable investments, but it would not be a driver of the product. However, the term ‘responsible’ could be misleading as it may be interpreted as an equal alternative to sustainable products. This is in line with the response provided by the Financial Services Consumer Panel who, like Nucleus, has highlighted that it may not even be necessary as a category.

    In summary

    At Nucleus we believe it’s important for advisers to have objective measures for their clients within this evolving industry. We’ve seen the risks of greenwashing and want to ensure that clients and their advisers have the information needed to make the best decision for each and every person.

    Although it’s still in the early stages, anyone wanting to stay ahead of the curve will be keeping a close eye on the FCA’s next steps. A consultation is expected in Q2 2022 and will be key to those frontrunners being able to fully embed this throughout operations and strategy.




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